of elite. that's what hold development back. the lack of big trees falling and creating new. it gets back to the gm question. it gets back to the gm question and it's -- you need to have the capability in society to repurpose what is released when something dies. when something old falls. there's not been in a place like pakistan or in egypt. i didn't get to china or anything. it's a totally different story. ting gets to the point. philadelphia, -- philip auerswald what do you teach? >> i teach economics and social entrepreneurship. i'm a believer in the entrepreneurship as a transformative force in society. it is, of course, thinking about how to address public challenges in an entrepreneur manner. potentially in new life pathway

to make the most of that. .. there are many people who work on this topic who have helped move forward on the agenda but louise is one of the man deserves a lot of credit. >> we have been talking with philip auerswald, "the coming prosperity," how entrepreneurs are transforming the global economy. his most recent book. booktv of location at george mason university.

>> tell us what you think of our programming this weekend. you can freeze us at booktv, comment on our facebook call or send us an e-mail, booktv, nonfiction books every weekend on c-span2. >> at the end of world war ii we had twelve million men under arms. we have 2,000 flag officers and generals. today we have 1,000 flag officers and generals and 1.2 million under arms. the ratio is totally out of whack. we almost have an admiral for every ship in the navy. not a captain, and admiral. what we have done is go through and look at areas where we could not necessarily save all of the money but we could transfer

responsibilities that are not truly in defense of the country out of the pentagon and consolidate programs and save a significant amount of money. >> you can talk with oklahoma senator tom coburn about the fiscal cliff, affordable care act and the future of the republican party on booktv's index. the senator has written several books and reports including his latest, the debt bomb. join our freedom our conversation with calls, e-mails and tweets comical doctor and author and senator tom coburn at noon eastern on booktv's in depth on c-span2. >> now on booktv thomas stanton argues the difference between companies that successfully made it through the 2008 financial crisis and those that didn't was willingness of upper management to listen to feedback before making decisions. this is about an hour and 15 minutes. >> good afternoon and welcome to the cato institute's. i'm the director of financial

regulations, mark calabria and i am moderator of today's book form. when reading press coverage of a financial crisis one constantly comes across phrases like the banks did this for the banks did that. lost in these generalities, there was no one responds to the financial crisis or events that preceded it. different firms took a different approaches. several ceos and their boards made 4 decisions that led to their failure, others made good decisions, prudent decisions and sometimes brilliant decision that not only save their firm is allowed firms to gain market share come out stronger than ever. while in my own riding via tended to place considerable emphasis on the poor public policy choices that caused this crisis it is important to keep in mind not every bank responded to these policies in the same manner. consider for a moment the role of monetary policy leading up to the crisis. the federal reserve engineer raise steep yield curve that provided firms with a strong

incentive to borrow short and when huang. it is not an exaggeration that bear stearns was mostly done in by the extreme mismatch in its assets and liabilities. however, firms show the different strategy while facing the same yield curve. the book discusses the strategy of goldman which was less profitable at the time but more stable. the book discuss today some firms thrive and others failed, fundamentally about why different firms made correct decisions and others did not. it is opprobrious that the book form is in the hyatt auditorium. what separated successful firms from the failure was how well management utilized the first information within both their terms and the marketplace, firms that failed were management was

insulated. dependent on their own knowledge. firms that succeeded where those management harnessed the information within their firm by creating effective feedback mechanisms. let me go back and remember a little bit when i first came to washington after my doctorate and one of the first books i was exposed to was tom's book titled the state of ridge, where the government sponsored enterprise in the financial crisis, clearly tom was years ahead of his time at his predictions turned out to be all too accurate. a very long track record of being one of the 04 most forecasters of the state of the financial-services industry but when he is not writing books he spends his time as a fellow at the center for dance to governmental studies at johns hopkins university. tom also served as staff on the financial crisis inquiry commission and in my opinion there are a few things i would

disagree with the commission's findings one thing i know for certain is the commission's report was stronger because of tom's involvement. the book is also informed largely by tom's experience on commission staff. we are fortunate to have with us alex pollock to offer his thoughts on the book. alex is resident fellow at the american enterprise institute. i got to know alex a decade ago when he was president and chief operating officer of the bank of chicago from 1991 from 2004 and i would also say i always found him to be one of the most insightful commentators on the financial service industry so with that i turn the podium over to thomas stanton. >> thanks very much, mark. good afternoon. i think it is acting in. it is a pleasure to join you today at the cato institute. i am extremely grateful to kato and want to express my thanks.

years ago i wrote a monograph that raised questions about the financial soundness of fannie mae and freddie mac and i wrote the book that mark alluded to, a state of risk, government sponsored enterprise could be the next financial crisis. and in a and freddie mac didn't like my autograph and they didn't like my book. >> and they didn't like you. >> and suddenly it became a little chilly. catherine england who at the time was head of regulatory affairs at cato invited me out of the cold and said why don't you present what you found and what is happening? in to a luncheon meeting such as this were a number of senior federal officials who had taken pscs for granted and suddenly we were launched on trying to sound the alarm and preform the structure and oversight of

government sponsored enterprises so i am grateful to kato. unfortunately as peter wallace has pointed out, our largest financial institutions are like government sponsored enterprises. they benefit from the belief that government will bail out their debt holders. shareholders may like high risk that's particularly high leverage because they get the high returns from those high risks at least until something goes wrong. by contrast, debtholders have traditionally been a force for moderation in the marketplace because they only get a fixed rate of interest whatever the debt obligation promises and when the company starts to take more risk they are disadvantaged but implicit government backing of the death of our largest financial institutions mean that this market discipline has

suddenly been undermined so today i want to talk about my new book "why some firms thrive while others fail" and as mark noted this builds on my work at the financial crisis inquiry commission. we studied internal documents. i can't tell you how many, from financial institutions and the regulators and risk officers, bankers, traders, regulators, policymakers and other people to try to understand from everybody's perspective putting it all together what went on here and in 2010, we were still in a stage when people in wall street and in the financial system were in shock and pretty ready to tell us their story. i don't need to tell you particularly looking at the younger age of this audience that the financial crisis was immensely expensive with

pervasive effects in the country, maybe ten million households are going to lose their homes to foreclosure, house prices declined to the point where almost a quarter of homes are worth less than the mortgages of the property, the unemployment rate doubled, millions of people lost their jobs, median household wealth fell by trillions of dollars, the poverty rate rose to its highest level in 17 years and graduating students have a lot harder time finding appropriate work than ever before. much of this damage might have been afforded or mitigated by better governance, risk-management and better management generally in both the public and private sectors. perhaps the most important task before us, and what i tried to do in writing this book is understand the expensive lessons of the crisis for public and private institutions and how we can avoid these mistakes in the

future. in the book i tried to understand the differences between four major firms that successfully navigated the crisis and eight that failed or required government support in the -- to stay afloat ridge in my book is failure. i studied four surviving firms, jpmorgan chase, goldman sachs, wells fargo and toronto bang, now td bank which since the crisis has appeared in washington, a number of street corners. jpmorgan chase's story is preparing the company in advance to be strong enough to take advantage of long term opportunities. goldman is a firm wide system and capacity to react quickly to changes in the environment and tripping heavily over reputation low-risk. wells is a company with a culture of customer focus and restraint and td bank provides a simple lesson if you don't

understand it, don't invest in it. each of these terms applied strong governance, good management, operational confidence and discipline but with different approaches. some of these firms had serious problems since the crisis and jpmorgan chase actually lost billions of dollars in their london office in an event that reveals poor risk-management. the point here is these terms have successful strategies for weathering the crisis. there's a difference between taking a large loss such as jpmorgan recently took and having the company failed. the companies that failed the crisis did not just take losses but went out of business, required massive amounts of taxpayer aid, ended their existence as independent companies. and successful firms included fannie mae and freddie mac, bear

stearns, lehman, merrill lynch, citigroup, wachovia, ubs, aig, and wamu. with variations they exhibited similar shortcomings in organization, governance and management. many of these institutions had become so unwieldy that they were virtually impossible to manage. managers may have profited from organizations of $1 trillion or more, it is not clear that this massive size benefited marketed the efficiency or the financial system or firms that failed their shareholders. we forget how large our financial conglomerate actually are. in 2008, citigroup with 350,000 employees and 20,000 subsidiaries the complex financial institution.

aig, stronger than most of the major firms comprise 223 companies that operate in 130 countries and 116,000 employees and in my book i try to share with the reader exactly how complex these firms are and the aig chart, they are really small compared to our large complex financial institutions, take the four pages of fine print and a huge number of organizational boxes. we -- governance, compound and organizational shortcomings, overbearing ceos dominated week boards that failed to uphold the duty of respectfully challenging management to provide feedback and proposed limitations and probe the limitations of proposed management initiatives. another characteristic of unsuccessful firms was their pursuit of short-term growth without appropriate regard for

risk. in 2005 to 2007 fannie mae and freddie mac decided to increase their purchases of some prime mortgages just as home prices peaked and declined. other firms also decided to increase risk around the same time. some firms, countrywide, aig and citigroup continued the blind pursuit of market share without regard to changing market circumstances. where whirred the regulators? to say the least government actions before the crisis were seriously inadequate to protect against the economic debacle. knots' and related is the fact that the financial insurance and real-estate sector was by far the greatest source of campaign contributions to federal candidates and parties contributed almost half a billion dollars in the election cycle 2007-2008 alone.

financial services industry too often used its clout to lobby for government policies that ultimately hurt rather than benefited major financial terms. classic was the may fannie mae and freddie mac fought for years against more capable supervision and better capital standards. that might have saved them from making bad decisions that destroyed the two companies in 2008. the industry's political strength impeded other supervisory actions as well such as the effort of regulators to limit excessive lending concentrations in non-traditional mortgages or commercial real-estate. the question then becomes whether from the perspective of organization and management there's any major recommendation that if well implemented could have allowed more firms to survive. the literature on decision making in large organizations

actual yields and answer. sidney finkelstein of the school of business in dartmouth and his colleagues analyzed decisionmaking a large organizations and found bad decisions require two elements, first and initial flawed decision that the c e o or another influential person made and seconded poorly structured decision process that failed to provide facts and input to correct the mistake. to overcome this good decision making requires what my book calls constructive dialogue. if i may borrow a felicitous phrase, feedback is a gift. doubts and to send need to be seen as offers to rethink a preliminary decision before it potentially causes harm. in the financial sector successful firms manage to create productive and constructive tension between those who wanted to do deals for offer certain financial product

and services and those in the firm who were responsible for limiting risk exposures. by creating a respectful exchange of views among divergent perspectives successful firms freed themselves to find constructive outcome is that took the best from each point of view. instead of simply deciding to do a deal or not, successful firms considered ways to hedge risks or otherwise reduce exposure from doing the deal. successful firms for constructive dialogue between ceos and their boards, and their top management and between revenue producing units and risk officers. be unsuccessful firms produce ventures without constructive dialogue without those concerned about the risk. my favorite example is a credit officer of fannie mae, and we are buying these mortgages,

giving the amount of risk contained and the boss said to them can you explain why you are the only person in this company who believes in your model? they disregarded from their risk officers, freddie mac in 2005, fired his ceo, chief risk officer just as the company increased its risktaking. and the risk officer in 2007, by contrast, constructive dialogue and robust sense of the risk reward tradeoff successful firms sometimes retain more capital than their competitors and many times refrain from lucrative but risky product and transactions that seem to be making so much money for their competitors. constructive dialogue was engrained in the company's culture. this pattern also applies to non financial firms. my book discusses decisionmaking

and costly mistakes such as the bp gulf oil spill, fatality that the mining company, hospital medical errors. nonfinancial firms show the same patterns of overbearing or distracted ceos or others such as doctors who make 4 decisions without obtaining feedback. cultures that emphasize production without adequate consideration of risk and inapt regulation, ceos a large complex financial institutions need feedback from capable sources. my suggestion here is to apply constructive dialogue to relations between large complex financial institutions and supervisors. regulators may not have the expertise available, available to large complex financial institutions they are in a position to ask simple questions such as the amount of capital

that a firm has allocated to back potentially risky activities. and lowering standards to meet expense of grants for -- and chasing london office while he was making large profits and before it took a $5.8 billion loss this year. i you making all of your money because you are the smartest person in this highly competitive market or are you simply taking more risk than everyone else? feedback from regulators can improve decisions merely by opposing the right questions and pursuing the answers. constructive dialogue is a 2 way street. feedback isn't worth a lot of it comes from an in-depth source. regulators need to be open to input that examiners who are engaged in checking the compliance drills without understanding the real risks of the company's business, whether there are too many examiners for

multiple regulators on site without a focus on the most important issues with particular examiners not open to constructive dialogue. constructive dialogue can improve decision making all the way around and help to improve quality in both regulators and the firms they supervise or as ceo edmund clark successfully led td bank to the crisis argues there must be productive working partnerships between the industry and regulators enabling both parties, what needs to be done and on the least intrusive way in making it happen. my book cites testimony of shell oil co. marvin odum to the deepwater horizon, and he said industry needs a robust expert we staffed and well funded regulator that compete pace with

the industry's technical expertise. a competent and nimble regulator will be able to establish the rules of the road to shore safety without stifling innovation and commercial success. the chairman and ceo of exxon mobile told the deepwater horizon commission much the same thing. the observations about the petroleum industry apply to the financial sector as well. to improve our public and private institutions we need to have higher quality supervision aimed at improving decisionmaking in the industry and greater economic efficiency. regulators are not always right. rather, we need regulators that are capable of offering high quality feedback to our largest financial institutions so that through constructive tensions with their regulators firms may make improve decision that take

account of long-term sustainability and not merely short-term profits and bonuses. this could free as from the sterile debate about whether there is too much regulation too little. the results of that debate i respectfully suggest are thousands of pages of laws and regulations that are unlikely to forestall another financial crisis in the future. indeed, government rescues of large insolvent firms coupled with substantial compensation that c e os and senior managers of failed firms manage to keep for themselves means that once the economy returns to a semblance of health incentives to take non economic risks may be even greater than before. opening constructive dialogue in these issues will not be easy given the current atmosphere in washington but would seem well worth the effort. thank you.

>> thanks, tom. alex, would you like to operate few comments? >> thanks very much for giving me the opportunity to comment on tom's very interesting and very useful book. i said that having been a practicing banking executive. overbearing ceo? i was a ceo for 14 years and i wonder if i was overbearing, surely not. tom, in his book, sites frank night's risk and uncertainty and profits, deservedly famous work from 1921 and i consider tom's theme to be how to address the reality stated by night, uncertainty is one of the fundamental facts of life.

it is ineradicable from business decisions. one interpreter of night expanded on this all little bit and said most business decisions especially strategic ones are to varying degrees steps into the unknown. each of the possible outcomes, business venture, considered to have some probability of occurring but these probabilities are not known to the players or decisionmakers. to get night right you have to change the sentence of little bit. these probabilities are not known and cannot be known for the players of the system of uncertainty. indeed. so how some firms thrive while others fail can be fought of as how they deal with such uncertainty and affect that many

things which were considered impossible by many, most people, have a way of nonetheless happening. tom gives us a most voluble exploration, drawing insightfully from many interviews with the financial crisis inquiry commission but i will point out it is not warmly terms, it is any and all organizations including governments dealing with uncertainty, and the inability to know what the results of their actions will be. out of the federal reserve had considered a boom in housing trying to cause housing prices to climb, the wealth affect to offset a recession?

what kind of internal debate and risk management should the federal reserve assess? personal accounts of discussions and arguments about the riskiness of actions in tom's book is deeply constructive and displays the amount of uncertainty involved in such discussions. it reminds me of my old friend minty cited in the book, i had very interesting discussions while he was still alive and he told me one day and never published this story, but he told me this in person, he said the economic and financial system is made of two fundamental types, he called them entrepreneurs and bankers. are entrepreneurs are warm, optimistic, energetic, risk

loving, self confident, able to leap tall buildings in a single bound, and if they are successful they show that they can do. bankers need to be cold, rational, pessimistic, cynical, and worried about the risks. a healthy economy or financial system is the result of an ongoing dialectical balance between the two fundamental types. we conceal lot of this in tom's book. this is underlineed in risk uncertainty and profit of the entrepreneurial type. most men have an irrational lehigh confidence in their own good fortune. not the inherent bankers and

risk managers but many. and irrational the high confidence in their own good fortune and this is doubly true when their personal prowess comes into the reckoning, when they are betting on themselves. little doubt that businessmen represent mainly the class of man in him these things are most strikingly true. the that the entrepreneurs. and they describe low wheat need naysayers, and those with restless energy and oil and operation in themselves in particular and this is the entrepreneurial type. and these are the characteristics which allow the entrepreneurs to achieve great things and also to go broke. this great quote in tom's book about a long history of success is the biggest precursor to tell you think about what the

successful entrepreneur has learned. he learned when i have all of these helpers' around, it is too risky. whenever work. how does he look at all these advisers and the entrepreneur is, we have to ask ourselves what happens to the dialectic, the entrepreneur and banker. when the entrepreneurs take over the banks. this is the point he was making. when this entrepreneur real tank takes over the bank which is supposed to be the risk averse, cynical, worried about risk tight, what do you get? you might get a bubble. what can you do? then you have to reproduce this

dialectic, the optimists or the pessimists or the i can do anything versus the warrior, focus your on risk, reproduce this with discussion inside the bank, or between the bank and others, and tom's book is helpful in exploring how one might do this and how important it is to do this. as it happens, there are a lot of -- easy to say but it is hard to do. that is why we have four successful firms and 9 failed failures. there were more of each but among the big ones the failures really stood out. one of the problems is the great saying that the market can stay irrational longer than you can stay solvent so for example if

you were betting against housing or a lot of years, you would have lost a lot of money and today, with the federal reserve manipulation of the bond market, how many times can you be crushed betting against bonds, being sure that bonds will ultimately spike upward in il which they will but how many times can you be crushed as many people have been, worried about the risk and give up? we have a problem that when you cry wolf lot of times and will doesn't come you lose credibility as a warning device, but remember the fable of crying wolf, in the end wolf does come in financial cycles the wolf does come. this problem of creating the internal dialectical imbalance between the entrepreneur and risk-management comes nicely in

some memoirs by louis xiv which he called difficulties surrounding kings. he talks about being king and having to confront opportunities and murmurings which are exposed, force of character is required to keep the correct balance between so many people who are striving to make your judgments in line to their side, each one finding himself to give an appearance of justice to what he is seeing. that is true. as tom suggests, one thing to do as you do this right is to have the right inner circle around the c e o or the chairman or the leader. what is the nature of this circle? a circle who is not impressed by the drama by which the leader leads everybody else.

you have to surround yourself not with people who love your drama and the great charisma you have created but who know you well enough to know that is all nonsense. you may be good but you are not that good and they will tell you the truth and will fill in your inevitable gaps and mistakes and inevitable gaps in your own knowledge. that is asking a lot of the human character, to build an inner group like that, but i think that needs to be done and that is one of the important lessons in the book. to conclude this thing that has to be done, which is really powerful, is not easy to do. tom's book shows that it can be done with examples he cites and s tom says this is completely different from as you just heard him say thousands of pages of

laws and regulation. we will do it in building this dialectic or balance of the fundamental types of thinking around the inevitable, unavoidable uncertainty faced by all organizations or to some it up, how do we make sound judgments in the face of uncertainty? >> thank you. i want to see if tom has any comment, whatever makes you comfortable. >> totally comfortable with either. let me stand on the other side. there is a lot of wisdom in alex's discussion and i am particularly delighted with louis xiv. alex mentioned central banks making mistakes.

i personally d interviewed a number of senior fed officials, some retired at that point who said that when ben bernanke for whom i have a lot of respect for what he and secretary paulson did to deal with the crisis after occurred, in spring of 2007 ben bernanke made a speech and he said the sub prime crisis will be confined to the housing market. the economists have all done their calculations within the fed and said these are small numbers compared to the size of the banking system, the number of sub prime mortgages is small enough, everything will be fine. the supervisors, at the examiners, the people who oversee safety and soundness of banks at the fed who were really second class citizens in the

fed's culture and structure were screaming we have seen the balance sheets of these institutions, they are highly leveraged, and they can't take the hit. because there was no constructive dialogue or dialectic as alex would point out, between the economists and the supervisors. ben bernanke made his optimistic statement without understanding that the supervisors had an awful lot to contribute to his knowledge and what he should have foreseen. what i found in a number of organizations, public and private is -- i don't put it in this book the way, the layer of pork between the top of the organization and the bottom. you see in the nasa space shuttle disaster where the front

wine individuals -- engineers knew there was a problem and somehow their concerns run into a layer of pork and all of a sudden these people are not able to get their opinions heard or listened to by senior management and that would be the source of a lot of problems and that is the reality that a bank examiner should be looking for rather than all of these formalities people are insisting on in terms of dodd-frank. i filed a combat with the fed because they talked about risk management and want a new rule for large institutions that says your board should have a risk committee and there should be somebody on the risk committee knows about risk. and i said exactly. jpmorgan chase had a risk committee and they knew about

risk and lost $5.8 billion. you don't want to the formality of risk-management. fannie and freddie and risk-management committees with responsibility for risk-management on the board and so did lehman. you want to look at the realities. i have a large successful term before arranging the interview with the ceo, downloading on me about how awful it was their regulator was insisting that they have as a formal risk committee doing things in a certain formal way, when they were doing very well and they were doing very well, quite a centralized structure and a different way of doing business so my bottom line is we have got to look for this dialectic, we have got to look for the quality of the decisionmaking process in our public and private institutions or else we are

going to be in trouble and dodd-frank doesn't do that. >> one of the reasons i wanted to see if people would read the book, it is about the decentralization of knowledge. i would agree one of the flaws of dodd-frank is the attempt if we just centralize all risk and all knowledge in one place somehow it will work and the repeal has not worked and appreciated the comments about various boards, people forget that and ron was compliant already with sarbanes oxley board requirements so it would not have made a difference. it is helpful to get a little background, what led you to pick the firm is you did for failure and success? >> next question. we started out, i was looking all over for successful firms

and i remember asking about a number of firms and making preliminary contacts, they were not relevant to what we were looking at, the commission was looking at a range of firms so that gave me my opening. when we interviewed fannie mae and the deep dive going down from the ceo through people inside the organization, we didn't have time, we only had a year to finish our work and we worked on a tight budget but i insisted we do some studies of freddie mac, let's find out what the parallels are so we interviewed a number of risk officers at freddie mac and the ceo and others and it built out, and when i said back at the end i looked and the one institution we didn't interview was td bank

in canada, we didn't interview td bank but i started looking at their financial statements and in 2004 they said we are loading up because the united states some prime mortgages are really great deal and in 2005 they said we decided to get out of the american residential mortgage market. in 2006 they wrote we have taken losses over $100 million which was a lot for that company, but we are out. in 2010 and and clark the ceo gives an interview and says we got out of our exposure to some prime and all the stock analysts wrote that i was an idiot. so i collected as we went some comments that are unfortunately off the record rather than on in terms of alex's point at that the market is a little longer and he has a marvelous choice,

longer than you can say employed. one risk officer of a major company, she said to me i got two choices, either i was going to be a pain in management's neck or i was going to be known as a risk officer and a farm that. itself. she left in 2006, it is hard to be a risk officer so i get to the role of supervisors. cliff rossy is a risk officer and a number of different organizations that failed, countrywide, freddie i think it was, end when he went to the university of maryland he was going to get a medal for the financial system but he says would a risk officer needs his

year cover i am not saying the risk officer is always right, but you got to have this conversation to figure out, to make a robust decision and if the ceo doesn't want that, as far as i am concerned the supervisor is the only person left with enough clout to get it done. what i recommended to the fed, who knows what they're going to do, i am used to my recommendations not being heard. >> you and me both. >> what i recommended to the fed is they send their examiners into these institutions and they say show us major company decisions you made over the last year and show us where you adjusted those decisions with input from the board, input from an engage management team, input from the risk officer, input from the regulator and look for the realities of decisionmaking

rather than just the formalities. >> i would emphasize this is an important factor in any institution. some press the last couple weeks about looking at [speaking in native tongue]'s phone log, the same people repeated the and i have seen similar things where they looked at things during the crisis ended is interesting, i talked to commercial bankers and many of them say they had an impossible time trying to talk to [speaking in native tongue] query small handful of investment banks were constantly on the phone with them so it is important to get to these groups think situations and that is one of the problems of as an economist, a problem where the fed is stacked with economists rather than diversity and viewpoints that challenge the conventional wisdom. a number of questions but i want to see if there are questions from the audience. we have won over a year. please identify yourself and keep it in the form of a

question. >> that little admonition is one i hear from alex auld of time. i just purchased the book and look forward to reading it but we have had some discussions in the past. it seems to me you feel that at least in the financial services sector that regulation can be made to work and yet i am not aware of any instances where it really has worked in a meaningful way. and financial history, any recent -- going back further in time is replete with examples of failed regulation. can you point to any situation at any time anywhere in the world where there has been financial service regulation particularly with regard to

safety and soundness issues because i'm not aware of any. >> i don't want to get into canada versus the united states, but probably aim decent model. i want to flip it around because i agree, i struggled with in this book, what would work? people recommended breaking the banks. i don't think it is just size of banks that is important but the complexity of these institutions that makes them unmanageable as well but in terms of reality i didn't see that happening in the near future. what i was grappling with was how can we make regulation more intelligent? it is a suboptimal solution potentially but if regulators are worried about improving quality of decisionmaking that is a force for greater, not lesser market efficiency and that is what i was struggling

with with this proposed solution that we looked and triage -- look where we are. in the financial crisis the retail markets because we have deposit insurance we did not have people standing outside banks trying to get their money back. the panic and lines of people standing together money back with electronic in the wholesale market. all of a sudden losses occurred, everyone was on this happy bubble and losses occurred and i don't know what is on my balance sheets or yours so i am going to get my money back as fast as i can. one of the solutions that i see happening now with large financial institutions, government has said we can't afford that kind of panic again and so now the whole market is going away from market discipline rather than towards it so it is that context, i am trying to grapple with a

reasonable solution that you can convince people to implement, leaders in the industry and in government that might work? >> i share the skepticism on regulation. toomey the powerful take away is the knowledge part and got me thinking about traditionally we think of a real problem, you get the funding advantage or run your rivals out of the market, great market share, another issue is if your creditors feel they have something at risk, they are going to exercise their voice when they talk to you. we don't think you are doing things correctly but it did too big to fail world, you have eliminated the information flow from creditors to management, makes a dollar corporation.

>> right here. >> my name is steven short, you did not mention citizens united and i am wondering, not talking about the legal right of corporations to contribute to the political process but whether any analysis has been done as to consequences of such involvement and whether it is worse. >> citizens united was after 2008 so it didn't have an affect on the crisis as such. it may well -- in the campaign cycle influenced by it. and getting the implications in terms of -- it clear financial services industry had a large hand in writing the rules we got

in dodd-frank. and you want an emblematic example is stability oversight, we had one group that is overseeing financial stability and we created a council of 15 members and each constituency has their regulator on the council, voting non-voting member. that is not a way to run a railroad. and dodd-frank is filled with that. we did see the effect of constituents. >> there is a question in the front. >> the gentleman in the front? >> the credits will -- in several banks--the one thing i

thought was very interesting in this discussion, the thing i would like to point out is i don't believe you can regulate good decisions, i don't think you can regulate greed. what i found is this. you talk to the person at the bank, the ceo or someone making decisions i can assure you, the risk he is taking is well known but sometimes people get boxed into situations where they don't have choices. you have a result last year, picked the amount of money, and created that situation. you had -- do you think the shareholders take that into consideration? this level of profit to this level, you're going from this level to that.

that is where things became problematic because -- it is just explored because the growth factor and the ceo of the largest processing company. and look at financials, and what are your sales? the market, he needs to get more market share, gobbling up these things that the real force -- to the regulation. >> one of the chapters is entitled will it happen again? that is a question, not an

answer. >> it suggests. >> i am just trying to mitigate some of the circumstances. you are absolutely right. there are all sorts of dynamics that govern well. for example we interviewed the chief risk officer who had gone in and found some units that were operating not with a particular matter that you talked about but basically going for a little more returns than they deserve and it is always a red flag if someone is simply going for market share because there's no natural limit, you are always going for more and they actually replaced a couple of heads of major units because they were concerned about that dynamic. that is a well-run company. chase before the crisis was a well-run company.

fortunately jamie dimon hata fortress balance sheet so when their serious problems, it was more hubris than anything else. after the crisis with the london office they could take the $5.8 billion hit without going into the kind of problems that caused companies to fail. is not easy. >> it seems to some extent related to too big to fail is driven by the equity holders which tend in my opinion to have very different interests than the creditors and they say you will get bailed out, you are shifting more towards the mistaken attitude. another question -- >> can i make a comment? >> the question and the answer from equity markets, it is important to realize the people we call the shareholders, those

individuals are not shareholders or equity holders but hired managers of someone else's money. they are managers -- pension fund managers or mutual-fund managers but they themselves are agents running quarterly returns and lose their jobs if the market stays irrational but i don't think our discussion of the interplay between financial markets and financial firms is understood that fact. >> i would 100% agree. a big driver of something not examined to the extent that it has, the institutional is asian of the retirement system where there are all sorts of governance in the pension fund that lead to that short-term -- before we get to another question i want to ask a back row question given part of the title of the book is fail or

failure. i want to ask we repeatedly see places like citibank that we bailout three time so far so the economists in me wants to ask the question are we being overoptimistic thinking firms can change their culture, they not change their display of knowledge or rely more on that firm had the bad culture, it will fail and get rid of the bad culture and form with good culture, expand and take over market share and short circuit that in the financial service industry by not letting lots of firms fail when they should. my point would be what do you see the role of failure? >> failure is important. the trouble is when you got a financial panic that is ben bernanke -- this is in david wessel's book and i believe it, we were about to go into a depression. they are going to bail out

everybody and so at that point failure falls back to the taxpayer and inefficiency in the financial system rather than a few companies. .. the firms others that grew by acquiring other firms end up with an undigestible pass to build on the high use of knowledge.

like diamond, you slap your organization to a common information platform so at least you can see empires what kind of positions you taking. >> you have the problem of the -- [inaudible] platform. to say all the information being shaped by some understanding and what the problem is. and that's where as you nicely say in the book, you have the problem on cognitive herding. cognitive herding by firms, by government, by central bank, by anybody so we think about the problem in the same way, in the same category and that's a really hard problem to diversify. that's a nice -- problem. >> i think we had a question here. get to the gentleman here. >> thank you. [inaudible]

correctly what you're arguing is that we should regulators -- [inaudible] on the risk-management institutions of a bank more on the risk-taking culture and the risk-management culture and so on. the problem with that is as an outsider it's hard to understand what the culture is or even [inaudible] to regulate them. it's hard to measure with. how do you -- what criteria would you put in place to assess risk-management. could you maybe give a couple of god examples how regulators could got bank and improve the culture and try to -- to try to prevent . >> well, my personal take off point, one would hope it would evolve was to start at the top and get the bank or the institution to say, okay in the last year here's a major decision, here's how we modify

that decision based on input. you want to show people are willing to listen. herbert allison who was a treasury in a number of private sector positions before recommendation for the board. he never recommended for a regulators, the board undertake, send question near -- questionnaires to get an understanding of the culture. one of the best studies they saw while i was at the commission was on the regulators side. that was a federal reserve bank of new york that published a survey they did. it was anonymous, that quoted all of the examers, and when you heard the culture of the examiners make sure you don't rock the boat or et. you knew what the culture was about. you knew those aren't the people that can do much more than

that. so it's not easy, but i think we have to start down that road. and there are tools that one can apply. >> right here in the back. >> hi, tom. vern mckinley. i want to move to the specialty areas, fannie and freddie which pops in the mind when talking about culture. here we are four years later, they are as big as they were. freddie slunk a tiny bit. fannie is about $3 trillion where it was a few years wack. no plans on the table to wind either one down. i know, in the '90s you proposed road maps to get them wound down. do you want to update that if possible. do you see any possible way they can be easied back to the private sector over six year,

eight year, ten year period. or is it a lost cause? >> when i spoke at cato in 1989, after coming out with the monograph, bill, who was the head of the cato at the time after the talk we wandered in -- different not quite as elegant as this. it was nice. we were talking and we said how do you get rid of them. i said once they fail you can do anything you want with them. i was wrong. [laughter] hopeless optimism. [laughter] i don't have an answer because hidden in your question is a question of what the political process thinks about the thirty-year fixed rate mortgage. if we were willing to say we don't care about the thirty-year fixed rate mortgage, which simply a long-term instrument with a tail on it, at least, that can't exist in all phases

of the credit soik -- cycle, you can come out with one answer whether we need fannie or freddie or anybody else. if the political process wees a thirty-year fixed rate mortgage. then we have to go back with the discussion we have to look at second best kind of solutions. and there are some, but in the end this one has to be solved on the very highest level the way that the 2008 law was written only congress can repeal the charter of fannie mae and freddie mac. that turns it from a policy issue in to more of a politics issue. >> i will note having worked on 2008 act, you can impose losses on creditors within the framework that is currently at law. to me, certainly one of the more important of the gse is the perception that the creditors should be protected. thews something treasury could have done.

fha could have done and certainly i think in my. . >> would you have done it? >> i -- absolutely. [inaudible] fhfa can put them in receivership. >> they don't need. >> okay. yep. they get the shareholders out of the equation. until you take them out of the equation they are in a position where the government is under law has stepped in to the position of the board and management to try to restore these institutions to financial health. and what that means is that fhfa constantly get whip sawed with the demands agree, we want you to support national housing policy and they come back and say the legal responsibility is to support the gse. that means tighter credit standards than other policy makers might want. in other words, the public, private mix that made the gse so

hard for people to deal with in the beginning is continuing to confound people. but i agree with you. i mean, they should be in receivership, at that point you can make a policy decision on what your debt holders, what happens to them or the mvs holders or mortgage-backed security holders. you also begin selling off assets and doing other things. >> before i go to the next question,ly say the receivership famework before the failure is in some ways very much mirrors dodd-frank. if you believe the orderly resolution authority dodd-frank prevents too big to fail. you need to explain why it department work with fannie and freddie. the woman here in front who has been patiently waiting. >> hi, ann stone. and i was one of very few women in southeast united states that helped start and organize a barning. went through the problems, we

started a the the height of the snl crisis in '88 which was interesting during that time. and we were smart enough, we had problems with the permit in the bank and stuff like that causing concern to make it profitable enough eventually bought it. it ended up being a good investment. i wanted to ask a lot of speculation was done when financial melt down happened. that a couple of things were pant mount to the drivers of the crisis. one the effect of the gse on the primary mortgage market and the percentage of risk it went from 20 to 52% under the clinton and the change in the rule fas rule 157. i wondered how a change in the rule could be done and nobody saw that it was going to deval all the port follow owe -- the market. >> yeah. and how somebody could not see that.

and second part as a female, of course, a lot has been written there would have beenless chris sis if there were more women in the financial market. >> let me answer the last one first. i mean, given what i saw until the conclusion i reached in the book, diversity helps because you have people from a multiplicity of perspectives, and you -- huh? [inaudible] i would not want to betray any prejudice by saying what women do. i think a diversity on the board elsewhere is really helpful in a lot of cases. but you can always point to counter examples. there's a woman on the risk committee of jpmorgan chase when they just took the hit $5.8 million. mark to market is really -- what we saw was that certain tools in

the hands of the right managers are really good. that would apply to all derivative. in the hands of the wrong people really don't work. gold manuses mark to market, and they do it every night. goldman almost went out of business in 1994 again because of operations in the london office. i don't know what it is with -- or maybe the regulatory framework. they created a parallel structure to the traders what they call controllers. and every night the controllers will market traders position to market. and what that does is gives them -- and they roll it up to management. what that does is gives them a really good view of what is going on. the trouble with mark to market generically is it can exacerbate the cycle. when you're in the bubble, which

is incidentally when you need the risk-management, after wards -- when you're in the bubble, mark to market says your asset values are going up. everything is great. don't worry. be happy. when you're in a crunch, all of a sudden the values drop and you're done. so it's a tool and the right hands it's wonderful, and in the wrong hands, it doesn't work at all. and in the end, i don't know the answer, and would like to talk with somebody with more practice candle experience. that's how i learn is talking with people with different experiences. you wonder if one shouldn't keep two different sets of books so that you benefit the investor. that was really the part of the loss in the whole situation. the the inivser can get a better sense of the quality of an institution. >> i want -- i've been on the

fence on it on mark to market. ly note, you have always -- my understand sk nonaccountant have the option whether you hold something to maturity not mark to market or whether you held in the trading book. for the most part, i think it's a symptom of the group think that you got from treasury because they talk to investment banks on a regular basis, which were largely mark to market. goldman's book is 80 or 90% mark to market. bank of america is 15% mark to market. if you talk to only investment banks and you come up with something you want to buy assets below -- that doesn't work for commercial banks. i think there's more flexibility. we have time for one question left and gentleman over here. >> thank you. georgetown university. my question -- [inaudible]

a lot of investors rely on the rich agencies ratings. -- [inaudible] they were being built backwards. looking at what they should put in order to get that particular -- [inaudible] i have clients with the particular rating. in other words the bankings are able to recruit for a bright people but also -- [inaudible] in order -- much more than what can happen at the agencies. but exactly how the ratings work and know exactly what they need do do in terms of the ratings. and -- [inaudible] simply they want to expect as much -- [inaudible] that's what the job is. how do you look at this and in